Zipping across tradersâ screens on Wednesday: whispers that the UK might be next in line for a credit rating cut. Standard & Poorâs had this week already taken an axe to the sovereign ratings of Greece, Portugal and Spain. Clearly S&P had deficits and debt issues on its mind, and the UK could be next in line. Or so the theory went. The Wednesday speculation became unusually specific, in the form of a rumour that Barclays Capital had issued a note saying the UK was in danger of losing its Triple A-rating. That, however, was quickly quashed by the bank itself. Simon Hayes, BarCapâs chief UK economist, penned a reassuring response on Wednesday: Although there remains a question mark over the UKâs sovereign rating we do not expect a downgrade. S&P and Fitch have expressed some concern about the current government plans for fiscal consolidation, but we expect the next government to tighten policy by a little more than is currently projected. Given the broad consensus across the political parties about the need to reduce the public deficit, and the closeness of the main partiesâ stated consolidation plans, we do not believe that the election outcome will materially change the broad outlook for public borrowing and debt. On Thursday, however, BNP Paribas currency analysts appear to imply that the UK escaped an S&P downgrade; they had been on the chopping block. Whatâs more, even without a downgrade, sterling is very much in danger of catching the Club Med contagion. Hereâs what they say: The one notch downgrade of Spain by S&P to AA from AA+ is less an issue for the EUR than for sterling. Spanish bond and CDS spreads moved little following the downgrade on the simple reason that current spread levels are already reflecting the lower credit status of Spain. The downgrade of Spain has put the focus on the UK. Gross debt, net debt, budget balance, structural balance and the cyclical adjusted balance show weaker UK data compared to Spain. Only the fact that the UK has less net foreign debt may have prevented the downgrade. The current UK election campaign has created a phoney fiscal debate where all parties have created the impression that fiscal consolidation might be possible without significant expenditure cuts or rising taxes. That will prove to be an illusion. The fact that high fiscal debt and deficit levels are mirrored by an over leveraged private sector suggests that the UK simply cannot grow out of its high debt levels. External surpluses will be required, but to achieve external surpluses within an economy which has generally a lower level of productivity when compared to its main trading partner (the EU) suggests that the exchange rate has to give in. Todayâs TV debate among the three party leaders will be closely watched and is viewed as the final chance for the Conservatives to turn the polls in their favour. Failure to do so will result in a sharply lower sterling. GBPUSD breaking the 1.5130 chart level opens downside potential to 1.4700. Crumbs. And we were just about to book our eurozone holiday. http://ftalphaville.ft.com/blog/2010/04/29/215496/britains-very-own-aa-rating-rumours/